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BHP Billiton is pushing to drive the pricing of coking coal, which is used to manufacture steel, away from annual negotiations and towards spot prices, mirroring its successful move with the annual negotiations on iron ore.

The request by the world’s largest supplier of coking coal comes as it starts the annual negotiations with customers in South Korea, Taiwan, India and Japan, including the country’s largest steelmaker, Nippon Steel Corporation.

The steelmakers are resisting the changes and industry insiders believe that any move away from annual prices into contracts linked to spot prices will be gradual. Observers said that it was unlikely the changes would affect the 2010-11 contracts.

The market for thermal coal, used to fire power plants, has moved already from one based mostly on annual fixed prices into one of contracts linked to the spot market. But these changes took more than five years to take effect.

Coking coal spot prices have rallied in the past six months as China becomes a large importer owing to strong local demand and mines closures.

Traders said that prices had surged to about $175 a tonne, the highest so far this year and more than 30 per cent above the level at which annual contracts were settled for 2009-10. Moving to contracts linked to spot prices would enable BHP to obtain higher prices for its coking coal.

Miners and trading houses executives believe that prices could reach $200 a tonne in the first quarter of 2010. Prices shot up to a record of $300 a tonne in 2008.

BHP Billiton declined to comment, but earlier this year it said that it wanted to move away from annual “benchmark” negotiations, in which the first deal between a miner and a steelmaker creates a reference followed by the rest of the industry for 12 months, into contracts that track more closely the spot market.

BHP Billiton has successfully pushed ahead with non-benchmark contracts in the iron ore market just as negotiations for the 2010-11 contracts are starting.

Analysts expect a large rise in annual iron ore prices next year due to strong demand in China as Beijing has so far been unsuccessful in curbing surging steel output. The Chinese steel industry appears to be largely ignoring Beijing’s high profile campaign to rein in overcapacity, boosting demand for iron ore imports.

Despite the Ministry of Industry and Information Technology’s announcement last August of a ban on all new capacity projects for the next three years, 32 new expansion projects have been announced since then at 27 different steel mills, according to a report by Steel Business Briefing, the consultancy, in Shanghai.

“It is evident that market forces are more important for China’s steel mills than central government pressure,” said Graeme Train, SBB head of research for Asia.

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